Reclaiming Economics Part 6 - Profits, Monopoly, Labour & Capital

Orthodox economics has a problem with profits. It cannot explain where profits come from. It attempts to skirt around this problem by giving us lots of explanations of what profits are – even though sometimes it seems to define that according to the requirements of the argument. So, for example, it will at one point tell us that profits are a reward for deferring consumption. At another it will tell us that profits are a reward for risk taking. On another occasion it will tell us that, in the same way that wages are the return for Labour, and Rent is the return for Land, so Profits are the return for Capital. But, whilst all these things MAY be a justification for those that do defer consumption, do take risks, do employ Capital, they still do not explain where those profits came from! After all, Death may be the wages of Sin, but it still does not provide us with an actual scientific analysis of what causes it. Worse still, as stated in previous parts of this series, when orthodox economics DOES attempt to analyse the actual source of profits, it ends up at the ludicrous conclusion that under competitive Capitalism, profits should not exist, because that very competition will ensure that the prices of all inputs are reduced to costs!!!

The only economic theory that can explain the source of profits, and their distribution, is Marx’s theory. Even the other Classical Economists like Smith and Ricardo, were unable to properly explain it. The real problem for orthodox economics, as a theory essentially in the service of Capitalism, is that in order to explain profits you have to accept the existence of “exploitation”, that is you have to accept that the source of profits is the production of new Value by Labour, a part of which is appropriated by Capital without any equivalent payment. I have put the word exploitation in quotes, because for many Marxists, as well as their detractors the word has an emotive meaning, which is not entirely accurate in understanding the sense in which Marx uses the term. Another problem for orthodox economics, which is true of all bourgeois social science, is that because it is subjectivist, it takes forms existing under Capitalism, and then transplants the Capitalist content of those forms into similar forms found under other, completely different social systems, and epochs.

Social Surplus

For example, Alchian and Allen state, “Profits exist in all economic systems.” But, this is not true, or at least it’s not true in the sense that they imply. What is true is that all economic systems, beyond the most basic, where even subsistence is hard to maintain, produce a social surplus. Now A&A in the early parts of their book say they do not like the idea of such a social surplus. To an extent, I have some sympathy with their argument. They say, basically that such a concept is a bit woolly. It requires us to consider that there is some given level of social output – but, of course, if you work longer that output COULD be greater – and that there is some minimum level of consumption – yet we see people, at different times and in different places, considering what is the minimum to be completely different things, and even the same people can survive on considerably varying quantities of “necessities” depending upon the circumstances. A social surplus is derived by taking the latter from the former, but if, as stated above, these two quantities are so flexible, it makes a mockery of the idea of some definable “surplus”.

The Marxist economist Paul Baran makes a similar point in his book “The Political Economy of Growth”, where he sets out that, in developing economies, there is often a considerable potential surplus that could be mobilised for the purposes of development, but that this potential surplus is at considerable variance with the actual surplus. The reason is that, frequently, in such economies, a ruling elite consumes vast amounts of resources, either as a result of a “demonstration effect”, causing a mimicking of the lifestyles and expenditure of Western elites, or of expenditure on arms to fight local battles, or simply resources are swallowed up by bureaucracy and inefficiency. If all, of these could be overcome, he argues, a large surplus could be mobilised for development.

However, this demonstrates the point. A surplus DOES exist. How we define that surplus, how we define and quantify the component parts out of which that Surplus arises then becomes simply a matter of discussion and agreement. It may not be as precise a definition as we would like, but that could be a good thing. The whole point about social science is the fact that it is based not upon an analysis of essentially immutable materials, but of very mutable human beings, and social institutions! In fact, having understood that, what becomes more important is not to concentrate on placing some absolutely precise numeric quantity upon that surplus, but to understand the nature of the social and productive relations under which it is produced. Once you do that you can at once begin to understand the real nature of profits, whilst at the same time understanding their SPECIFIC nature as the form that surplus takes ONLY under Capitalism.

At a very basic level, it is clear that we CAN talk about a subsistence minimum for human existence. The average human male requires around 1600 calories per day. Although, it is possible to go below that level for some time, doing so for a prolonged period will result in ill-health, bone shrinkage and other diseases, and eventually death. Moreover, a certain quantity of essential minerals and vitamins must comprise part of that 1600 calories. If we think of animals in the wild they may at times, create a surplus – in the sense that they will store food – but it is only in order to provide for themselves at times when they may not be able to acquire enough food to meet their current consumption. They do not “defer” consumption, in order to make a profit some time later, but merely in order to consume rather than die some time later!

For millions of years humans lived like that. Even modern humans, who have been around for about 70,000 years, lived like that until around 10,000 years ago, when they began to settle down and conduct agricultural activities. It is at this point that human societies can begin not only to produce more food than is required for immediate consumption, so as to store it for future consumption, but that a surplus can be created that also enables certain members of the society to become specialists, providing a specific function for the gens or tribe, in return for their subsistence. Moreover, this increase in human productivity makes possible for the first time in human history the holding of slaves. Previously, there was no point holding slaves, because they could not produce more than they required for their own consumption. They were either killed, sometimes eaten, or more frequently, were simply absorbed into the conquering tribe – especially if their numbers had been depleted.

Now, slaves could be held who would produce more than was required for their own subsistence, and who, therefore, increased the social surplus available to the tribe. At first, such slaves were those taken prisoner during conflicts, but increasingly, as the story of Joseph and the Pharaoh in the Old Testament sets out, they were ordinary members of the tribe, who for one reason or another found themselves in straightened circumstances. As that story tells, they would frequently become debt slaves first. Unable to produce sufficient food for their needs, they would borrow food from the Pharaoh or other wealthy farmer. Unable to pay it back, especially with high interest, they would sell their children, thereby reducing their productive potential further. Then they would sell their wives, their land, until they had nothing left to sell, but themselves.

In such slave societies it is easy to see the basis of the creation of the social surplus, and the means by which it is accumulated in the hands of a rich, ruling class, which through its ownership of both land and, more importantly, slaves is able to dominate society. Although, even in the Roman Empire, slaves made up only a small percentage of the total population, the concentration of their ownership in the hands of a tiny minority, who owned vast tracts of land, formed the basis of the accumulation of great wealth and power. The slave owners could always undercut the peasant producers, whose smaller landholdings, and reliance on the Labour Power of just their families, restricted their output to not much more than was required for their own subsistence. But, it would be wrong to describe this social surplus as “Profit”. Not only were the vast majority of members of these societies peasant producers whose output went almost exclusively to meet their own immediate needs – that is they were not producing to meet the needs of a market – and so any surplus does not take the form of money to be reinvested in greater output – but even in respect of the slave owners, their wealth is not held in the form of Capital, but of land and slaves, and other Use Values. They too, do not produce for the needs of a market. Rather, their production is the production of USE Values. Their output goes to maintain large retinues of soldiers and so on, upon which their power and social standing can be enhanced. It goes on the building of pyramids or other great works, on patronising artists, philosophers and so on.

If we look at feudalism, then again we see that the social surplus does not take the form of profits. Now, wealth resides almost exclusively in the ownership of land, though the survival of slavery in the form of serfdom continues for a while. Where the slave simply produced a given quantity, and was handed back part of what they had produced, under feudalism, the peasant producer owns what they produce, but is required by law and custom to hand over part of it – typically half – to the Lord of the Manor, who in turn hands over his dues to the ranks above him, and tithes to the Church, who in turn, hand over shares to their superiors, and upon which the great wealth of the nobility and Church was established. But, again, this surplus handed over as Taxes, Rents and Tithes is not profit! Those who receive it do not invest it to increase their productive potential. They are not forced to do so as a result of competition in the market place to reduce prices. What both feudalism and slavery have in common with Capitalism, though, is that in all of them, wealth is created by a class of producers, slaves, peasants and workers – and the social surplus, created as a result of these producers not consuming all that they produce, is then appropriated not by the producers, but by some other class of non-producers – slave-owners, feudal Lords, and Capitalists.

What is specific about profit under Capitalism is that the social surplus created by the producers is not appropriated in the form of use-values by the ruling class, is not appropriated for the primary purpose of their own consumption and aggrandisement, but is appropriated in the form of pure exchange value, money, and now primarily for the purpose of re-investment, to expand production. And Capital is forced to do this, because unless it does so, it is destroyed. Only by accumulating, expanding, and introducing new techniques can each Capital remain competitive, and avoid being pushed out of the marketplace by others. In fact, in reality it is not the Capitalists who appropriate the Surplus Value from the workers, but Capital itself!

But, once this basic economic reality is understood, that the essence of the social surplus is that it is produced by one class and appropriated by another, the secret of the source of profits is easy to unlock. It amounts simply to this, workers produce an amount of Exchange Value greater than the Exchange Value they receive back as wages. It was the unlocking of this secret as to how this could be, whilst, at the same time, maintaining the basic law that Labour Power, like any other commodity, was bought and sold at its Exchange Value, that separated Marx from the rest of Classical economy. Orthodox economics, because it is the economics of the ruling class cannot admit this basic fact, because to do so undermines the whole of the Capitalist system, exposes it, for all of its talk of free and fair exchange, as being a system based on exploitation. Instead, orthodox economics, as stated above, prefers to justify profits rather than to explain them.

Justifications For Profit

If we take some of these justifications of profits, we can see what a shaky basis they are established upon. Take the concept of abstention, that is deferring consumption. As stated above, a squirrel abstains from eating some of the nuts it collects in order to save some to eat over the Winter. But, this act of abstention does not miraculously result in the store of nuts increasing in size via compound interest! Moreover, if profits are a consequence of such abstention then the greatest share of profits should go to workers, because the average consumption of a worker is positively frugal when compared to that of the average Capitalist! Workers who do manage to save – for example nowadays into Pension Funds – are largely in the same position as the squirrel, not the Capitalist. That is these savings do not provide the worker with CAPITAL, from which they can draw profits, but amount to little more than deferred consumption, allowing the worker to have some income with which to maintain a modest level of consumption in retirement. Its true that – if they are lucky and the underlying investments into which their pension has been placed have not crashed in the Stock Market – even the worker can receive a small amount of interest on these savings (though often even this is eaten away by inflation), but this still leaves us with the question of the source of the fund from which this interest is paid. As with the squirrel the simple act of deferring consumption cannot do the trick.

Nor can the simple act of lending the money saved as a result of deferring this consumption do the trick either. If I lend you money, which you then proceed to spend for your own consumption, I may as well have undertaken the consumption myself, because if you had no wealth to begin with – which is presumably the reason you borrowed from me – then having consumed what you have purchased, you have no wealth at the end of this process to pay me back even what you have borrowed let alone, any interest upon the sum borrowed. Worse, another justification for profits is often said to be a reward for risk taking. Well of course, people take risks every day without receiving profits for their endeavours. Workers risk not having a job as a result of bad decisions taken by managers over which they have no control. But, as the sub-prime fiasco has demonstrated, a large risk is lending to people who have little or no prospect of paying you back. In that case the return is not a large amount of interest, but the loss of all your money!!!!

So, it is clear that simply deferring consumption, or lending the money thereby saved cannot be a source of profit. In fact, its hard to see why anyone should be rewarded for such action either. Clearly, something more is required than just these two actions, the money must be put to some productive use, it must become Capital. But, put to productive use implies that something is produced. If I have £1,000 and lend this money to an entrepreneur then this entrepreneur will require payment for his labour. Let us say he is paid £100. The entrepreneur chooses a product to produce. He buys materials, which cost £500, a machine required for production that costs £100, and buys the necessary labour-power for which he pays £300. All of my £1,000 is spent. If then the entrepreneur sells the output for £1,000, I make absolutely nothing! The only way I can make a profit on the Capital advanced is if the product can be sold for more than £1,000.

The Mercantilists believed that this was the source of profits. Some orthodox economists try to pass this argument off as the source of profits even today. That was the argument used by A&A. They argued that because, B was prepared to pay more for X than it cost A to produce – something they were prepared to do, because even at this price they gained compared to how much it would have cost them to produce X themselves – then A could charge this higher price, thereby making a profit. But, its clear that this cannot be right. As Adam Smith himself pointed out in destroying the Mercantilists’ argument, if every Capitalist sold their products for 10% more than their value, they would each cancel one another out. It would simply be as if the price tag on each commodity had been inflated by 10%. If A sells to B a commodity whose Value is £100, for £110, and B sells to A similarly a commodity whose value is £100, for £110, then each could just as well have sold each other their products for £100! Both have cheated each other by the same amount. Nor can the solution be that some are bigger cheats than others. Although, as the economist Stuart set out, this can be an explanation for the profits of SOME Capitalists, it cannot be an explanation for the system as a whole, because if some are bigger gainers, then others are bigger losers. They still cancel each other out.

This is why, logically, this explanation of profits founders for orthodox economics, when it is forced to concede that competition would reduce prices to costs of production, thereby eliminating any profits. But, if we take the above example, we can see the implications of this. The entrepreneur buys materials whose value is £500. We are then forced to conclude that for the system as a whole this £500 cannot be the source of his profit, because he has paid its true value. Had he paid less then his gain would have been the sellers loss, had he paid more his loss would be the seller’s gain. The same is true for the machine that he buys. Yet, the Capitalists who sold this machine, and these materials made profits. So does he. The only other contributor to this process is the worker. But, the worker too has been paid the Value of his labour-power as defined as being the labour-time required for its production, the labour-time required to produce the food, shelter, clothing etc. that the worker buys with his wages in order to survive and reproduce.

Labour & Surplus Value

But, there is a difference between the commodity of Labour-Power, and these other commodities. A machine, and the materials used in production can confer no more value to the end product than they themselves contain. In fact, without being acted upon by Labour they can’t even do that, and their value would diminish through deterioration and depreciation unless Labour transformed them. But, that is not true of Labour-Power. The Value of Labour Power may be represented by say 4 hours labour-time, the time required to produce all of those items of food, shelter etc., but the worker once engaged by the Capitalist is capable of working and producing new value for much more than these 4 hours, for say 8, 10 or 12 hours. So, if the worker works for 8 hours, he has produced 4 hours of new value in excess of that required for his own production, in excess of what he has been paid in wages. Just as the slave produces a certain quantity of food etc., and receives back only a small part of what he has produced, in order to live, just as the peasant hands over a portion of his total production over and above what he required to live, so the worker, like the slave, produces a sum of value for the Capitalist, but receives back only a fraction of that sum in the form of wages, in order that he can live and reproduce.

It is important as stated above, however, not to confuse wage labour with slave labour, and to not confuse the surplus produced by the slave or the peasant with the surplus produced by the wage worker. The surplus produced by the slave is a surplus of use-values. So initially, is the surplus produced by the peasant, though as the market develops, and the peasant is forced to pay his rents in money more and more, this surplus assumes more the form of a surplus of Exchange Values, as the peasant is forced to produce goods to sell on the market in order to acquire money to make these payments. However, as Marx sets out in the Grundrisse, it is only with the development of wage labour proper that Exchange Value assumes its mature form, and that Exchange Value begins to replace Use Value as the dominant form of Value in economic relations.

See: Labour Power v Horse Power

Bearing this in mind let us look at the other arguments that A&A muster to explain profits. They also posit profits as Capital Gain. Even in orthodox economic terms this is dubious. There is a real reason for calling Capital Gains “Capital Gains”, and not “Profits”. But, let’s take the example, and analyse it anyway. In reality the criticism of this source of “profit”, is the same as those above. Where does the fund of value come from, out of which this Capital Gain can be paid? Imagine two people, each of whom own an asset in the form of houses. Both houses have the same market value of £100,000. Neither person has any other asset or income. Suppose, that one of these people decides that he believes the value of the others house is £110,000. Without some other asset to sell, or some form of income, this increase in the Capital Value of the house cannot arise, because the only value in existence is the £100,000 embodied in the other house. The only way in which this increased value of one of the houses can be manifest is if some new value is created. The potential purchases must create £10,000 of new value that they can hand over to the owner of the house in addition to the £100,000 embodied in the value of their own house. But, what does this mean in reality. As a human being, a worker, the second person not only has to produce this £10,000 of new value, in the meantime they also have to live. They require food, clothing etc. Before they can hand over this £10,000 of new value to the other householder they have to work to produce the value embodied in all of these necessary requirements. In other, words, we are forced to conclude that just as with profit this Capital Gain – for society as whole – can only arise if a social surplus is created, a surplus of value over and above that required to meet the needs of consumption. The failure to recognise this basic fact of economics is what leads to periodic bubbles in asset prices such as those seen recently in house prices.

Exchange, Monopoly and Profits

A&A provide us with another frame of reference for understanding how profits or Capital Gains can arise. Having previously set out the grounds upon which profit and consumer surplus can arise – varying levels of productivity between producers leading to gains from the Division of Labour – they argue that profits can arise basically as a result of mispricing, or unforeseen events. Some extraneous event can cause profits, because it may cause end prices to rise to a level not previously envisaged giving a surplus over costs, or else some event may cause input costs to fall below those envisaged, thereby leading to a similar divergence. Now, of course, viewed from the perspective of any individual Capitalist this CAN be the source of profits. But, for the reasons set out above, it can never be an explanation for the existence of profits for the system as a whole!

Nor, can the explanation they give that producers of inputs, particularly Labour-Power, systematically undervalue the input they are selling be an explanation. Its conceivable that the suppliers of inputs might undervalue the things they sell for one year, but seeing the profits made by those who they sell to far exceed their own, they would be quick to raise prices, or else to move their Capital into that other line of production. And if, Capitalism worked in the way that A&A, and orthodox economics proclaims, then workers too would simply bid up their wages, or else become Capitalists. Furthermore, would we not expect on average that there wopuld be as much overvaluation as under-valuation? But, we don’t we see Capitalist economies make huge amounts of profits overall each year. Where firms make losses, it is rarely because they have paid their workers too much!!!! Even recessions are not a sign of net losses. Reduced economic activity does not mean losses, but Capitalists removing Capital from production to avoid losses! In fact, often during a recession the Capital that is employed makes a higher rate of profit, due to lower costs.

In fact, if we consider the argument used by A&A previously where they demonstrated the reason for trade, and the source of profits we can see why this does not happen, and what the implications of it are. They are not the implications that A&A or orthodox economics wish to draw. They argued that as a result of specialisation both parties to the trade could benefit. One party was able to sell their product at a price higher than it cost them to produce – thereby making a profit. The other Party even at this price was able to obtain the product at a price lower than the price it would have cost them to produce – thereby obtaining a consumer surplus. The problem with this argument is, as I have said, that with a large number of producers in a competitive market, prices will be forced down to costs, so profits will disappear. Only, if we assume an element of monopoly can this argument be sustained. Now suppose that we admit this element of monopoly, and propose as our two exchanging parties not two independent producers, but rather posit one as being the Capitalist Class, and the other the Working Class. Now, the Capitalist class owns Capital in the form of machinery, land, buildings, materials, needed for production to take place, and also owns the food, shelter clothing etc. that workers need for their subsistence. The workers own only Labour-Power. If we set the example up in this way then we see how A&A’s graphic presentation and argument could be applied. Its similar to the example, of Land ownership and Rent. Because land is fixed in Supply, and because, therefore, those who own land exercise a Monopoly – no matter how high its price rises no new supply can be brought forward – these owners can charge Rent, that is they can charge an amount in excess of their costs. The situation with Capital is not exactly parallel, but is similar. Although, in any line of production it is always possible for Capital to enter, thereby bringing about an average rate of profit by competition, the total amount of Capital is at any one time relatively fixed in Supply just as with land. In fact, even with Land, its supply is not fixed for any particular purpose, and as the opening up of new territories in the New World demonstrated, if prices rise high enough, new supplies even of land can be brought about. We are beginning to see a similar thing now with land in Africa being developed as a potential new huge source of food supply, in reaction to rapidly rising global food prices.

In addition, new Capital is continually being created. Not only is this a natural function of the accumulation of Surplus Value, by existing firms, but every year, thousands of workers set up small businesses, former Managers try their luck, and so on. They use small amounts of savings along with borrowing from friends, family, banks and so on, to try to hit the big time. Around two-thirds fail within the first year, and most of the rest fail not long after that. But, some do succeed. Some really succeed, like Bill Gates and his mates, who went from a tiny business based in a garage to the world’s largest company. But, however, impressive such success stories, we shouldn’t be fooled into taking the exception as being the rule. Moreover, for every Microsoft, there is at least one old firm that disappears. Moreover, although, it might be possible for a small firm with little Capital to begin, as Microsoft did, in some completely new industry, and to succeed, in the vast majority of industries, which are not new, such a process is not possible.

Established industries, or areas of production, are dominated by big companies, by large scale production and the economies of scale that comes with it. It is simply not possible to enter say car production on a competitive basis from your domestic garage. Where large car producers like GM have been brought to their knees it is not the result of competition from a myriad of small producers, but a result of competition from other huge producers like Toyota. Although, there is sufficient Capital to ensure that the general principles of competition between Capitals continues, there is not sufficient Capital compared to the huge amount of available Labour Power to ensure that the two exchange on an equal footing. Capital always operates in a buyers market for Labour Power.

Its true on this basis, and that of the general specialisation of Capitalist production, that as a result of this exchange, workers could enjoy a “consumers surplus”. If we look at many examples, say China today, we see many peasant producers prepared to give up their independence to work for Capitalists in cities, because they can obtain a higher standard of living by so doing, even, though it involves selling their labour power at a price, which provides the Capitalist with a profit. This is a direct application of the argument A&A propose of exchange between producers. It is also the argument that Marx made in relation to the “Civilising Mission” of Capital. Through specialisation, it massively raises productivity, which even as it relatively impoverishes the worker vis a vis Capital, also raises his absolute standard of living.

But, if competition reduces prices to costs how come then that the Capitalists costs do not rise as workers push up wages, how come final prices do not fall to meet rising costs, thereby eliminating profits? Precisely, because of the element of Monopoly! Not the Monopoly of large firms versus small firms – though within this framework we can theorise that too in similar terms – but the Monopoly of Capital as against Labour. It is precisely because there are such a small number of Capitalists compared to the vast number of workers, that Capital is scarce compared to the ready availability of Labour Power, it is the fact, that the Capitalist can use their Capital in a multitude of alternative uses – for example, simply for unproductive consumption or speculation – whereas the worker can only use their Labour Power for one purpose – to be exchanged with Capital – because, unless they sell it they cannot acquire money, needed to eat, be clothed, sheltered and so on, that Capital does confront Labour in this Monopolistic manner.

In other words, profits arise in this model from all Capitalists selling their products at prices ABOVE their costs of production, whereas workers sell their Labour Power at its cost of production. So, although every Capitalist can recoup the losses they make as consumers in buying goods at prices above costs, by selling their own products at similarly inflated prices – and actual Monopoly producers can more than do so, by charging even higher prices, and making bigger “Monopoly” profits compared to small producers – workers cannot, because they do not stand in the same Monopoly position.

Engels sets out this argument in his Preface to Vol. III of Capital, in reply to one of Marx’s critics – W. Lexis. Engels says,

“One need not strain his thinking powers to see that this explanation for the profits of capital, as advanced by "vulgar economy," amounts in practice to the same thing as the Marxian theory of surplus-value; that the workers are in just the same "unfavourable condition" according to Lexis as according to Marx; that they are just as much the victims of swindle because every non-worker can sell commodities above price, while the worker cannot do so; and that it is just as easy to build up an at least equally plausible vulgar socialism on the basis of this theory, as that built in England on the foundation of Jevons’s and Menger’s theory of use-value and marginal utility. I even suspect that if Mr. George Bernard Shaw had been familiar with this theory of profit, he would have likely fallen to with both hands, discarding Jevons and Karl Menger, to build anew the Fabian church of the future upon this rock.

In reality, however, this theory is merely a paraphrase of the Marxian. What defrays all the price additions? It is the workers’ "total product". And this is due to the fact that the commodity "labour", or, as Marx has it, labour-power, has to be sold below its price. For if it is a common property of all commodities to be sold at a price higher than their cost of production, with labour being the sole exception since it is always sold at the cost of production, then labour is simply sold below the price that rules in this world of vulgar economy. Hence the resultant extra profit accruing to the capitalist, or capitalist class, arises, and can only arise, in the last analysis, from the fact that the worker, after reproducing the equivalent for the price of his labour-power, must produce an additional product for which he is not paid — i.e., a surplus-product, a product of unpaid labour, or surplus-value.”

See: Capital III Preface
Exploitation?

But, if that is the case, then given the conclusions drawn by A&A about the benefits to both parties from this exchange, is this in any case a bad thing? After all, not only did this specialisation result in profits, it also resulted in greater social output, and a consumer surplus. In a certain sense no, it is not. It is one of the reasons I said at the beginning I had put the word “exploitation” in quotes. Read Marx and Engels eulogy, even in the Communist Manifesto, of the amazingly progressive role that Capitalism played in revolutionising production, read their comments about Capitalism rescuing millions from the idiocy of rural life, or their comments about the progressive role played by Capital in transforming pre-capitalist economies in India, or indeed Marx’s comments in the Grundrisse about the “Civilising Mission” of Capitalism, and it is clear that neither Marx nor Engels position can be understood on the basis of some crude “anti-Capitalism”.

But, let us look at the reality of what A&A’s example actually demonstrates, and the conclusion it leads to. This analysis will also shed light on two further important elements of Marxist analysis – the differentiation of the peasantry, and the concentration of Capital. In that example, A has a Comparative Advantage in production over B. That is if we take two products X and Y, A can produce as much Y in a given time as can B, but can produce twice as much X during that time compared to B. The consequence is that it makes sense for A to specialise in producing X and for B to specialise in producing Y. The problem with this analysis as with much of orthodox economics is that it is static, whereas if we want to really understand the way economies and social systems work, we need a theory that is dynamic, that recognises that change is fundamental.

Let us assume that the reason for A’s superior productivity is wholly natural. It could be that they work better land, it could be they are stronger, more skilled or whatever. The fact remains, however, that as a result of this variation, and assuming the same conditions that A&A assume – that is that as a result of the existence of some form of monopoly, competition does not drive down the price they are able to charge to cost of production – A is able to make a profit. B has a consumer surplus, because they are able to buy some X for less than it would have cost them to produce themselves. If we simply see things as this cycle repeating itself over and over again then all we see are mutual benefits on both sides. But, reality does not work that way. The reality is that the profits made by A, will allow them to invest in their production, by introducing more machinery, perhaps even new, more productive machinery. Either way, they will be able to use these increased resources to increase production and thereby obtain the benefits of economies of scale. There productivity will rise as a consequence. But, B is not at all in this position. They have a consumers surplus, but not profits. They are not in a position to invest profits, and expand production.

What began as a natural advantage for A has now become something different, it is an advantage based on the greater accumulation and usage of Capital, an advantage based on greater size and economies of scale. If we maintain the argument as set up by A&A then in this dynamic model, the continually falling costs of A, will result in ever increasing profits, as the price of X remains constant determined by the price that B is prepared to pay for it, based on their own costs of production and subjective preferences! A wider and wider gulf must open up between A and B! In fact, once markets begin to develop in economies we do, in fact see precisely this process. Some peasants become richer, whilst others remain fairly constant, and others become pauperised. This is the “Differentiation of the peasantry” so wonderfully described and analysed by Lenin in his “The Development of Capitalism in Russia”. In this dynamic model, the cosy world of mutual benefit of both parties disappears, because over a fairly short period of time, the better off peasant is able to hire labour, buy horses and other equipment, whilst the poor peasant scrapes to survive. The poor peasant is forced to work on the rich peasant’s land in order to raise his income to pay taxes etc. Ultimately, - like the peasants in the story of Joseph and the Pharaoh – he is forced to sell his land, and to turn himself into a worker.

But, this separation is even more marked when we view the relationship between Capital and Labour. Yes, the huge increase in productive potential, the effects of the “Civilising Mission” of Capital ensure that the workers’ living standards rise, even rise significantly, but at the same time the difference between them and the Capitalists grows ever wider. At each stage that the process is ratcheted up, the minimum amount of Capital that is required to produce efficiently gets raised way beyond what the individual worker can muster, at each stage then the Monopoly of Capital is raised as against Labour, and consequently its ability to create profits from the exchange with Labour is increased.

However, is even this the fundamental basis of the Marxist critique of Capitalism? Is it this existence of increasing exploitation, which gives rise to the demand for the overthrow of Capitalist relations of production? The answer again I think is no. Marx was at pains to separate himself from the Moral socialists of the type of Sismondi, who railed at the gross injustices of Capitalism. If Marx were alive today, he would surely be even more justified in doing so. In Marx’s day, even in the world’s most advanced economy – Britain – workers lived in conditions of absolute poverty and squalor. Every few years the trade cycle threw workers on to the streets, and into starvation. Life expectancy had fallen in half to not much more than 20 years. But, his analysis of the “Civilising Mission”, demonstrated how those living conditions could rise at the same time that workers position vis a vis Capital deteriorated. The comparison today between workers conditions, and in Marx’s time is stark, a thorough vindication of his argument in relation to that Civilising Mission.

It would be totally alien to Marx’s hostility to Moral Socialism, to look at the standard of living of workers today, and to condemn Capitalism solely on the basis that the cost of that improvement was that a few individual Capitalists had at the same time become even more fabulously wealthy. That is not the politics of Marx, it is the politics of greed and envy, of cutting your nose off to spite your face. The Marxist critique of capitalism is far more significant than that, far more rooted in the objective historical method. I will look at that in the next part in this series.

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